Self-employment Tax Calculation Optional Methods  

How Can the Optional Methods Help You?

• Social Security Coverage - The optional methods may give you credit toward your social security coverage even though you have a loss or a small amount of income from self-employment.

• Earned Income Credit (EIC) - Using the op­tional methods may qualify you to claim the EIC or give you a larger credit if your net earnings from self-employment (deter­mined without using the optional methods) are less than $4,200. Figure the EIC with and without using the optional methods to see if the optional methods will benefit you.

• Additional Child Tax Credit - Using the op­tional methods may qualify you to claim the additional child tax credit or give you a larger credit if your net earnings from self-employment (determined without us­ing the optional methods) are less than $4,200. Figure the additional child tax credit with and without using the optional methods to see if the optional methods will benefit you.

• Child and Dependent Care Credit - The op­tional methods may help you qualify for this credit or give you a larger credit if your net earnings from self-employment (deter­mined without using the optional methods) are less than $4,200. Figure this credit with and without using the optional methods to see if the optional methods will benefit you.

• Self-employment Health Insurance Deduction - The optional methods of computing net earnings from self-employment may be used to figure your self-employed health insurance deduction.

         Caution: Using optional methods may give you benefits described above, but may also increase your Self-employment tax.

Changing Your Method

You can change the method after you file your return. That is, you can change from the regular to the optional method or from the optional to the regular method. To do this, file Form 1040X.

Farm Optional Method

You may use this method to figure your net earnings from farm self-employment if your gross farm income was $6,300 or less or your net farm profits were less than $4,548. Net farm profits are:

•   The total of the amounts from Sched­ule F (Form 1040), line 36, and Schedule K-1 (Form 1065), box 14, code A, minus

•   The amount you would have entered on Schedule SE, line 1b, had you not used the optional method.

There is no limit on how many years you can use this method.

Under this method, report in Part II, line 15, two-thirds of your gross farm income, up to $4,200, as your net earnings. This method can increase or decrease your net earnings from farm self-employment even if the farming business had a loss.

For a farm partnership, figure your share of gross income based on the partnership agreement. With guaranteed payments, your share of the partnership’s gross in­come is your guaranteed payments plus your share of the gross income after it is reduced by all guaranteed payments made by the partnership. If you were a limited partner, include only guaranteed payments for services you actually rendered to or on behalf of the partnership.

Nonfarm Optional Method

You may be able to use this method to figure your net earnings from nonfarm self-employment if your net nonfarm prof­its were less than $4,548 and also less than 72.189% of your gross nonfarm income. Net nonfarm profits are the total of the amounts from:

•    Schedule C (Form 1040), line 31,

•    Schedule C-EZ (Form 1040), line 3,

•    Schedule K-1 (Form 1065), box 14, code A (from other than farm partnerships), and

•    Schedule K-1 (Form 1065-B), box 9, code J1.

To use this method, you also must be regularly self-employed. You meet this re­quirement if your actual net earnings from self-employment were $400 or more in 2 of the 3 years preceding the year you use the nonfarm optional method. The net earnings of $400 or more could be from either farm or nonfarm earnings or both. The net earn­ings include your distributive share of part­nership income or loss subject to SE tax.

Use of the nonfarm optional method from nonfarm self-employment is limited to 5 years. The 5 years do not have to be consecutive.

Under this method, report in Part II, line 17, two-thirds of your gross nonfarm in­come, up to $4,200, as your net earnings. But you cannot report less than your actual net earnings from nonfarm self-employ­ment.

Figure your share of gross income from a nonfarm partnership in the same manner as a farm partnership. See Farm Optional Method on this page for details.

Using Both Optional Methods

If you can use both methods, you can report less than your total actual net earnings from farm and nonfarm self-employment, but you cannot report less than your actual net earnings from nonfarm self-employment alone.

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Last modified: 01/24/10